Don't Race Out To Buy AbbVie Inc. (NYSE:ABBV) Just Because It's Going Ex-Dividend
AbbVie Inc. (NYSE:ABBV) is about to trade ex-dividend in the next 4 days. Ex-dividend means that investors that purchase the stock on or after the 14th of April will not receive this dividend, which will be paid on the 14th of May.
AbbVie's next dividend payment will be US$1.30 per share. Last year, in total, the company distributed US$5.20 to shareholders. Last year's total dividend payments show that AbbVie has a trailing yield of 4.9% on the current share price of $106.1. Dividends are an important source of income to many shareholders, but the health of the business is crucial to maintaining those dividends. So we need to check whether the dividend payments are covered, and if earnings are growing.
View our latest analysis for AbbVie
If a company pays out more in dividends than it earned, then the dividend might become unsustainable - hardly an ideal situation. AbbVie paid out 177% of profit in the past year, which we think is typically not sustainable unless there are mitigating characteristics such as unusually strong cash flow or a large cash balance. A useful secondary check can be to evaluate whether AbbVie generated enough free cash flow to afford its dividend. Thankfully its dividend payments took up just 46% of the free cash flow it generated, which is a comfortable payout ratio.
It's disappointing to see that the dividend was not covered by profits, but cash is more important from a dividend sustainability perspective, and AbbVie fortunately did generate enough cash to fund its dividend. Still, if the company repeatedly paid a dividend greater than its profits, we'd be concerned. Very few companies are able to sustainably pay dividends larger than their reported earnings.
Click here to see the company's payout ratio, plus analyst estimates of its future dividends.
Have Earnings And Dividends Been Growing?
Businesses with shrinking earnings are tricky from a dividend perspective. If earnings fall far enough, the company could be forced to cut its dividend. So we're not too excited that AbbVie's earnings are down 2.8% a year over the past five years.
Another key way to measure a company's dividend prospects is by measuring its historical rate of dividend growth. In the last eight years, AbbVie has lifted its dividend by approximately 16% a year on average. That's intriguing, but the combination of growing dividends despite declining earnings can typically only be achieved by paying out a larger percentage of profits. AbbVie is already paying out a high percentage of its income, so without earnings growth, we're doubtful of whether this dividend will grow much in the future.
The Bottom Line
Should investors buy AbbVie for the upcoming dividend? It's never great to see earnings per share declining, especially when a company is paying out 177% of its profit as dividends, which we feel is uncomfortably high. However, the cash payout ratio was much lower - good news from a dividend perspective - which makes us wonder why there is such a mis-match between income and cashflow. With the way things are shaping up from a dividend perspective, we'd be inclined to steer clear of AbbVie.
Although, if you're still interested in AbbVie and want to know more, you'll find it very useful to know what risks this stock faces. For example - AbbVie has 5 warning signs we think you should be aware of.
A common investment mistake is buying the first interesting stock you see. Here you can find a list of promising dividend stocks with a greater than 2% yield and an upcoming dividend.
This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.
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